Opinion Contributor

Should Obama pick Larry Summers to head the Fed?

If Summers gets the job, the author writes, he won't have the luxury of silence anymore. | AP Photo

By MIKE KONCZAL | 7/25/13 4:44 PM EDT

Right now, President Obama is grappling with one of the most important decisions of his second term: whom to appoint to be the next chairman of the U.S. Federal Reserve. That person will play an outsized role in determining how the economy works over the next several decades. With rumors circulating that former Treasury Secretary Larry Summers is now the frontrunner, overtaking previous favorite Janet Yellen of the current Fed board, it’s important to understand everything the next chair will have to accomplish.

The next chair of the Federal Open Market Committee, as the powerful body that controls the U.S. money supply is formally known, will face three major issues during his or her tenure. The first, and most urgent, is to determine how to navigate our economy out of the current doldrums. The second is to decide how aggressively to enforce the new set of financial reform rules that emerged from the financial crisis. And the third, crucially, is to find a way to rebuild monetary policy and the Fed so that the United States won’t see a repeat of the current crisis. Yellen is clearly the superior candidate on all three counts.

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The current Fed chair, Ben Bernanke leaves behind no new paradigm for how to run monetary policy after the crash. Bernanke has been like a fireman, using a range of unorthodox tools to keep the economy from falling apart. The next chair, however, will be like a fire marshal, determining how we rebuild the U.S. economy so that it is as “fireproof” as possible.

Economists are debating what it would take to reset the Fed’s policy to prevent a run of lost decades for the United States. Some argue that the Fed will need to make some dramatic changes to the way it does business, such as by setting policy according to the total amount of spending in the economy or promoting a higher rate of inflation. This will give the Fed more room to react the next time there is a recession.

But more of the same is far more likely: Some form of muddling forward as is, with crossed communications and jerky starts and then stops, is probably inevitable without someone at the helm to steer the Fed out of its comfort zone.

This inertia problem is why putting a persuasive consensus-builder in charge is key. Yellen has a well-documented history within the Fed system as being someone who can bring wayward colleagues around. The whisper campaign against Yellen aims to argue that this skillset is either unimportant or even a liability, but it couldn’t be more crucial.

As a new governor in 1996, Yellen argued, marshaling a wide range of evidence and research, that Alan Greenspan, then the Fed chair, shouldn’t take inflation all the way to zero. Had she lost that debate, the last two recessions would have been much more vicious. The next chair will be asked to oversee a much more complex and contentious debate about the Fed’s future role — and Yellen has a proven track record here.

And what of Summers, supposedly the odds-on favorite? While Yellen was leading the debates over monetary policy in the Great Recession, the former Treasury secretary was simply missing in action. There’s no evidence, either in high-end academic journals or in his wide range of policy editorial writing, that Summers has engaged on monetary policy during the crisis, which have been the most important monetary policy debates of the past 30 years. There have been extensive debates on monetary policy in the crisis, ranging from whether or not the Fed’s second round of so-called quantitative easing (“QE2”) stopped a double-dip recession in its tracks in 2010 to how important it is to set monetary policy to future conditions. There’s no evidence that Summers weighed in on either of these important debates at the time. Yet if Summers gets the job, he won’t have the luxury of silence – markets will hang on his every word and deed.